Cuba's Best Market

A reporter from Bloomberg recently telephoned to discuss the imminent legalization of importing Cuban cigars to the United States. I thought the caller was slightly optimistic because I think it will be a number of years, at the soonest, before we see the abolishment of the U.S. trade embargo against Cuba. The reporter, however, seemed convinced the end was near, especially after the loosening of travel restrictions between our country and Cuba.

One of the most interesting tidbits of information he divulged was that sources told him that close to 80 million cigars were lying in warehouses in Havana waiting to be shipped to America the moment the embargo was lifted. I would love to know his sources! It is possible there are that many Habanos cigars in Cuba, but I think it is more likely the result of a global sales slowdown rather than a commercial strategy for Cuban cigars in the United States.

Cubans are not particularly fond of storing and aging cigars for long periods of time. Bails of tobacco are one thing. I remember in the early 1990s, that the cigar industry had thousands of bales of tobacco, particularly strong filler tobacco like ligero, with five to six years of age. Even today the Cubans age their strongest tobacco up to three or four years in bales.

Rolled tobacco is another thing, however. Cigars lose their character much more quickly on the island, and they are more fragile than leaf tobacco. Power shortages, hurricanes, bugs and other difficulties can wreak havoc on aging smokes on the island. I have very close friends who have lost thousands of dollars worth of rare smokes in poorly stored places in Havana.

The Bloomberg article dated June 19 said that "the possible end to the 47-year-old embargo on Cuba trade has intensiﬁed a legal and lobbying ﬁght between cigar makers Swedish Match AB of Stockholm, and Imperial Tobacco Group PLC of Bristol, England. Each wants exclusive rights to sell Cuban-made brands in the U.S., the world's largest market for premium cigars."

As you probably know, Swedish Match, through its U.S. company General Cigar, and Imperial, through Altadis USA, produce and sell in the United States numerous Cuban-origin cigar brands that are made in various countries such as Nicaragua, Honduras and the Dominican Republic. Among others, General has Partagas and Cohiba and Altadis Montecristo and Romeo y Julieta. General has the most to lose since it does not own the global rights for such brands, while Altadis does.

It said later in the article that General Cigar, the U.S. subsidiary of Swedish Match, had spent more than $5 million over the past year lobbying Congress over Cuban cigar brand ownership and importation issues. The story added that Imperial just began recently lobbying—although he didn't mention how or what—and spent $30,000. (That seems absurdly little. I have a friend who spends more in a month on his stash of Cuban cigars! So that doesn't sound very serious.)

Moreover, I have no idea why Imperial would be lobbying Congress considering, as I just wrote, it already owns the distribution rights for a number of key Cuban brands in the world—including for the United States. Besides, if and when the American market opens, Habanos S.A., the global distribution company for Cuban cigars, could simply open up shops in Miami or New York or anywhere else in the states and sell them under new brands. Imperial owns 50 percent of Habanos, and the U.S. market represents a quick way to recoup part of its multibillion-dollar
investment in Habanos' owner Altadis SA as well as increasing profits and share price.

As General Cigar's counsel, Gerry Roerty was quoted in the Bloomberg piece about the potential for Cuban cigar sales in the United States when it all becomes legal: "'The market is going to be turned upside down,' Roerty said in an interview. After waiting for almost ﬁve decades, Americans 'will buy a Donald Duck cigar if it's a Cuban.'"

The funny thing is that we Americans already smoke a lot of Cuban cigars. For years I have been telling people—including CNN and other news organizations in interviews—that Americans illegally buy about 8 million to 10 million Cuban sticks a year. But earlier this year when I was living in Cuba for more than a month, I realized that I was grossly underestimating the amount.

Habanos S.A. talks internally of a number more than double my estimates. Yes. Estimates for American Cuban cigar consumption are around 20 million cigars of a total of about 150 million exported each year around the world.

But the shocker is that some Cuban cigar merchants believe that the real figure could be as high as 50 million cigars. Stated in another way, one out of three Habanos sold each year in the world might end up in the hands of Americans.

Interviews have been done with top cigar shops in key cities in Spain, France, Switzerland, Germany, Belgium, Great Britain and others around the world, and most reported that between 20 and 50 percent of their Cuban cigar sales went to Americans. The cigars are bought in a number of ways including visiting the shop, telephoning or faxing orders, or using the Internet. There's a thriving bootlegging business for Cuban cigars as well through Mexico and Canada.

The topic of Cuban cigar sales to America came up earlier this year over lunch when I asked a friend from Habanos which market he thought still had the biggest growth potential in this gloomy economy. I was sure he would answer something like China, Russia, Saudi Arabia or Brazil.

But he answered with a big smile: "The United States." And he didn't mean when the embargo is dropped.

I almost fell out of my chair as we were smoking a Montecristo Maravilla, which was part of the Colección Habanos series in 2005. The cigar was phenomenal, by the way. It showed wonderful aromas of cedar, nuts and cappuccino that followed through to a fresh and rich palate that increased in intensity with each puff. It was SO Montecristo with the cedar and creamy character. It was a great smoke. 95 points, unblind.

In between puffs, my friend gave an example of how Americans can affect the sales of a Cuban cigar market when things go wrong. He said that when the United States started the war in Iraq, and France didn't support us, duty-free sales in France dropped from 4 million Cuban cigars to 2 million in one year simply because less Americans traveled to France. "It was a big decrease for us," he said.

It makes me wonder what will happen to the global market for Cuban cigars when the trade embargo is finally dropped. Inevitably, sales in all those cigar shops around the world from Mexico City to Montreal to London to Milan to Dubai to Hong Kong to Sydney will drop. Americans will be able to buy their Habanos at home, so why would they bother buying them anywhere else?

"We think that the first year we can sell up to 100 million cigars in the United States," he said. "And then it will peak out at about 50 million cigars."

This certainly doesn't make most non-Cuban cigar manufacturers happy either. According to the Bloomberg article, General Cigar has already "hired Miller & Chevalier, a Washington law ﬁrm specializing in trade issues, to study how else it might slow the ﬂow of Cuban imports if the embargo goes."

However, to slow the importation of Cuban cigars to the United States when the trade embargo is finally dropped is going to be like holding the dikes during Hurricane Katrina in New Orleans. America's taste for Cuban cigars is already well established and it's insatiable. In fact, the United States already seems to be the biggest market in the world for Cuban cigars. It's only going to get bigger when Cuban cigars are legally available in cigar shops across the country.